Giffen good
A Giffen good is a unique type of economic product that defies the conventional law of demand, which typically states that as the price of a good increases, demand decreases. Instead, for Giffen goods, an increase in price can lead to an increase in demand, particularly among the poorest segments of society. This phenomenon is named after British statistician Robert Giffen, who observed such behavior in the 1800s. Giffen goods are usually inferior goods, meaning that as consumers' incomes rise, they tend to buy less of them, opting for higher-quality alternatives.
Giffen goods are most often associated with staple food items, such as rice, bread, or potatoes, which serve as essential sources of calories. In certain economic contexts, particularly those with few available goods, these staples can become Giffen goods when rising prices compel consumers to allocate a larger portion of their budgets to these necessities, even as they become more expensive. While examples of Giffen goods are rare, some modern studies have suggested instances in specific regions, such as certain areas in China where rice and noodles exhibit Giffen behavior. This concept highlights the complex interplay between economics, consumer behavior, and social conditions, marking Giffen goods as an intriguing topic for further exploration.
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Giffen good
A Giffen good is a good whose price increases as demand increases. The Giffen good is a well-understood economic theory and tool, but economists have found it difficult to identify true Giffen goods in the real world. British statistician and economist Sir Robert Giffen first proposed the idea of the Giffen good in the 1800s. Economists believe that Giffen goods are most likely to be observed in economies with a small number of overall goods. Giffen goods are non-luxury products, so an increase in their price most affects society's lowest-income populations. Because they increase in price as demand increases, Giffen goods break the important economic law of demand. They are one of only a few types of goods that break that economic law.
Background
A Giffen good breaks the law of demand, one of the most fundamental economic rules. The law of demand states that the price and the demand for a good are inversely related. In other words, as a product becomes less expensive, the demand for the product increases. However, if the price of the product increases, the demand for the product will decrease. This happens because of the substitution effect, which states that consumers will substitute a more expensive product with a less expensive one to save money. Economists believe that rational thinking motivates people. Therefore, they will act rationally and save money where they can by purchasing a similar good for less money. The law of demand is often pictured using a demand curve. This curve graphically represents the relationship between a good’s price and the amount of the good consumers are willing to or able to buy at a certain price. The price is plotted on the curve’s y-axis. The amount of the good being consumed is plotted on the curve’s x-axis. In general, the demand curve slopes downward to the right. A demand curve for a Giffen good slopes upward to the right because it breaks the law of demand.
Overview
Giffen goods are goods whose prices increase even while the demand increases. Giffen goods are different from most goods in a market because most cost less when the demand is higher. British statistician Robert Giffen is the namesake of the Giffen good. Alfred Marshall first attributed the idea of the Giffen good to Robert Giffen in the 1890 book Principles of Economics. Giffen made observations about Giffen goods while living and working in Victorian England.
In nearly all examples, even theoretical examples, Giffen goods are staple food products that people need to survive. For example, potatoes, bread, and rice are some of the staple food items people around the world eat. A Giffen good generally has no substitutes, and these staple foods have no substitutes, either. They are the cheapest form of calories people in specific areas can consume. All Giffen goods are inferior goods, but not all inferior goods are Giffen goods. (An inferior good is a good that people buy less of when they have more money.)
It is easier to identify Giffen goods in economies with limited consumer goods. For this reason, economists have found it easier to identify Giffen goods in experimental economies. Although evidence of Giffen goods in real markets is limited, economists understand how much goods could exist. For example, many economists use a market in which a staple food is a Giffen good because it has no lower-cost substitution.
A traditional example that many people have used as a Giffen good is potatoes during the Irish potato famine of the 1840s. As the price of potatoes increased, people living in Ireland had to stop spending money on meat and other luxury goods and spend more of their money on potatoes. Then, these people had to buy more potatoes to make up for the lack of meat and other foods in their diet. However, many modern economists have pointed out that the price of potatoes rose in Ireland because the famine decreased supply. Therefore, this is not a good example of a true Giffen good.
In 2007, two economists from Harvard University most likely identified one of the few true Giffen goods in a real-life market. Economists Robert Jensen and Nolan Miller identified a particular section in China where the dietary staples of rice and noodles seem to be Giffen goods. In this part of China, when people consume more rice and noodles, the price increases. Then, just like in Ireland, as people have to pay more money for these staples, they have less money to spend on other types of food. To eat the required number of calories needed each day to survive, the people in this part of China buy more and more rice and noodles to replace other types of food.
Giffen goods are not the only type of goods that break the law of demand. A Veblen good is another type of good that breaks the law. As the price of a Veblen good increases, the demand for the good increases simultaneously. This means that a Veblen good’s demand curve has an upward-sloping curve. The main difference between a Giffen good and a Veblen good is that a Veblen good is a luxury good. Veblen goods are items whose increasing price actually makes them more desirable because people seek acceptance and popularity based on their purchases. The increase in the cost of a Veblen good indicates the taste of the people in a particular market, but the increase in the price of a Giffen good does not particularly indicate taste. It indicates need and availability.
Another difference between the two is that a Veblen good is a luxury good, and a Giffen good is a staple good that people depend on. Staple goods, such as rice, could not be Veblen goods because it is impossible to make such a staple into a luxury good that is difficult for most ordinary people to buy. Furthermore, luxury goods are not Giffen goods because Giffen goods are inferior goods. Most economists have theorized that government bonds could become Giffen goods if the market conditions were right.
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